HPCL cancels Iran oil shipment

India’s Hindustan Petroleum Corp (HPCL) cancelled the purchase of an Iranian oil cargo earlier this month after its insurance company refused to provide coverage for the crude because of U.S. sanctions. 

Background 

Hindustan Petroleum Corporation Limited (HPCL) is an Indian state-owned oil and natural gas company with its headquarters in Mumbai.It was incorporated in 1974 after the takeover and merger of erstwhile Esso Standard and Lube India Limited by the Esso Act of 1974. The company is ranked 367th on the Fortune Global 500 list of the world's biggest corporations as of 2016.HPCL has been steadily growing over the years. The refining capacity increased from 5.5 million metric tonnes (MMT) in 1984/85 to 14.80 million metric tonnes as of March 2013. 

Iran with its abundant supply of oil and natural gas,is the second largest supplier of crude oil to India.  They supply more than 425,000 barrels of oil per day, and consequently India is one of the largest foreign investors in Iran's oil and gas industry.In 2011, the US$12 billion annual oil trade between India and Iran was halted due to extensive economic sanctions against Iran, forcing the Indian oil ministry to pay off the debt through a banking system through Turkey. 

Recently, President Trump, a long-time critic of the Iran nuclear  deal went ahead and pulled out of the pact in May 2018. Washington also imposed a series of additional sanctions on Iranian entities, individuals and foreign companies. The United States also said that it will exert "maximum economic and diplomatic pressure" on other countries to stop buying crude oil from Iran. Washington has threatened the JCPOA’s remaining signatories with punitive measures if they engaged in trade and investment with Tehran. 

Analysis 

HPCL, India's third-biggest state-owned refiner, renewed its installation insurance, which protects against any accidents at its refinery or storage sites, in early July. However, the new policy would not protect against any incidents involving Iranian oil processed or stored at its refineries.The refiner had planned to load 1 million barrels of Iranian crude onto the Suezmax tanker Ankaleshwar in early July but cancelled the purchase after it was unable to sell it on to another buyer. 

Although, HPCL's Iranian imports account for only 20,000 barrels per day (bpd) of its full demand of 316,000 bpd, other Indian refiners that take larger volumes are likely to face the same problem if their annual policy is up for renewal before November. 

"The problem in procuring Iranian barrels appears to be happening much before the Nov. 4 deadline," said Senthil Kumaran, a senior analyst at consultants FGE. "Most of the reinsurance market is based in the US so without the blessing of the US, Iranian oil buyers will find it almost impossible to take and process Iranian cargoes."Indian insurers rely on state-run General Insurance Corp for reinsurance, which depends on western re-insurers to hedge its risk. 

Iran had hoped to sell more than 500,000 bpd of oil to India during the current fiscal year that started in April.However, the insurance issues may mean a reduction in imports even as India is intent on continuing dealings with Iran.

Iran was the second-biggest oil supplier to Indian state refiners between April and June, replacing Saudi Arabia as companies took advantage of steeper discounts offered by Tehran.The refiners – Indian Oil Corp, Chennai Petroleum Corp, Bharat Petroleum and its unit Bharat Oman Refineries Ltd, Hindustan Petroleum and Mangalore Refinery and Petrochemicals – shipped in 9.8 million tonnes of Iranian oil in 2017-2018, about a quarter less than a year ago. 

While oil trade is extremely crucial for Iran’s economy, India also stands to gain from it. Price of oil imports from Iran has always been less than that of Saudi Arabia since 2016-17. If India were to stop its oil trade with Iran, it would lose a supplier of cheap oil and face even greater price because of the supply shock created due to Iran’s exit from the global oil markets. 

Counterpoint 

The oil minister, Dharmendra Pradhan in the Rajya Sabha said, India has taken note of US re-imposing economic sanctions on Iran Oil. He added that,"Oil PSUs import crude oil mainly keeping in view the domestic requirements and they have diverse crude oil sources besides Iran.” 

Since, India pays Iran in euros using European banking channels there is still a possibility of acquiring Iranian oil for the time-being as the European countries are signatories and in support of the JCPOA. 

Assessment

Our assessment is that the HPCL cancelling purchase of Iran oil is only the beginning of the US sanction consequences of India. We feel that an  oil shock will hurt India exponentially at a time when the global economy is staring at the prospect of a trade war and depreciating rupee is threatening to jeopardise the country’s macroeconomic stability.  We also feel that diplomatic efforts with the US and Iran are interim solutions to the oil crisis at hand. We believe that India must soon be on the pursuit of achieving their long term goal of self-sufficiency in energy.